30% of Retirees are Making Expensive RMD Mistakes

When you are retired, making a mistake with your required minimum distributions could have very serious financial consequences. RMDs are required for certain kinds of tax-advantaged accounts, and if you don't take them when you're supposed to, you could face very expensive penalties.

Unfortunately, recent research from Vanguard showed that many retirees are making major RMD errors.

In fact, so many people are making major mistakes that collective losses total as much as $1.7 billion per year. So, what's the costly RMD mistake retirees are making? Here's what you need to know.

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This common RMD mistake comes at a huge cost

According to Vanguard's data, around 6.7% of clients who had traditional IRAs with Vanguard and who had reached RMD age did not take any withdrawals from their IRA in 2024.

Among those clients who should have taken RMDs but who didn't do so, the RMD amount they should have withdrawn from their retirement plan was $11,600. Since retirees are subject to penalty rates of 25% for failure to take the required distribution (reduced to 10% if the mistake is corrected within a two-year window), those who don't take their RMDs could find themselves facing a tax penalty between $1,160 and $2,900.

Unfortunately, these retirees weren't the only ones making an error, either. Another 24% of Vanguard clients took withdrawals below the RMD threshold, which can also lead to penalties. And 69% withdrew more than the RMD level, which isn't necessarily a problem as long as this is part of their retirement planning process and they've chosen a safe withdrawal rate that makes sense for their situation.

"Reducing the rate of missed RMDs by even a modest amount could save investors hundreds of millions of dollars each year," Andy Reed, Vanguard's head of behavioral economics research, said in the Vanguard report that shared this troubling data.

Take your RMDs to avoid serious consequences

You don't want to find yourself facing a huge tax penalty, so be sure to comply with RMD rules. Specifically:

• Effective Jan. 1, 2023, RMDs were required starting at 73
• Effective Jan. 1, 2033, RMDs will be required starting at 75

RMDs are intended to make sure money comes out of tax-advantaged accounts eventually so you can pay taxes on it since you put the funds away tax-free. RMDs are required for:

• Traditional IRAs
• Rollover IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k)s
• 403(b)s
• 457(b)s
• Profit-sharing plans
• Inherited IRAs and retirement accounts

If you're required to take them, make sure you understand the rules and withdraw the minimum required amount by the deadline so you aren't among the 6.7% of seniors who are wasting billions on penalties.

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